Remember how last fall that “heroic” Manhattan-based U.S. district court judge Jed Rakoff “ripped the SEC a new one” by blocking a massive settlement the agency had proposed with Citigroup for the bank’s allegedly knowing and fraudulent acts in the run-up to the great recession? At the time of Rakoff’s decision last November, I wrote:

When U.S. district judge Jed Rakoff rejected a $285 million settlement between the Securities and Exchange Commission and Citigroup on Nov. 28, he effectively marched out of the federal courthouse on Foley Square and took his place as the most powerful protester in Zuccotti Park. In a blunt court order, Rakoff broke with decades of judicial deference to the feds and suggested that regulators were enabling Wall Street’s efforts to hide allegedly “knowing and fraudulent” acts from the public. While the decision’s long-term effects depend on the case’s future in the courts, it could immediately impose new standards of accountability and disclosure on an often too cozy system of financial oversight.

It turns out that whole “breaking with decades of judicial deference” thing is a problem, legally speaking. On Thursday, the 2nd Circuit Court of Appeals, which oversees district courts in New York, Connecticut and Vermont, ripped Rakoff a new one, staying his ruling and suggesting that his decision misunderstood their previous rulings, overstepped his authority to challenge regulators and made unwarranted assumptions about what had actually happened in the case. The stay can be found here (pdf). Reports the New York Law Journal:

The Second Circuit said Judge Rakoff (See Profile) failed to show proper deference to the SEC’s judgment that the settlement of fraud claims stemming from the sale of mortgage-backed securities was not against the public interest… [and] stayed Judge Rakoff’s ruling ordering a trial in the case while the circuit considers appeals by both the SEC and Citigroup. The panel said both parties showed they would probably prevail in their challenges to Judge Rakoff’s decision… [and said Rakoff] “prejudges the fact that Citigroup had in fact misled investors.”… “[Further Rakoff] does not appear to have given deference to the SEC’s judgment on wholly discretionary matters of policy,” the circuit said [and]… “misinterpreted” certain rulings in holding it was against the public interest to approve a settlement in which Citigroup made no admission of liability, when in fact, those rulings “stand for the proposition that when a court orders injunctive relief, it should insure that injunction does not cause harm to the public interest.”… Finally, the court said it had “no reason to doubt” the SEC claim that the settlement was in the public interest…

Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement, “We are pleased that the appeals court found ‘no reason to doubt’ the SEC’s view that the settlement ordering Citigroup to return $285 million to harmed investors and adopt business reforms is in the public interest. As we have said consistently, we agree to settlements when the terms reflect what we reasonably believe we could obtain if we prevailed at trial, without the risk of delay and uncertainty that comes with litigation. Equally important, this settlement approach preserves resources that we can use to stop other frauds and protect other victims.

So will Rakoff’s decision still compel higher standards of disclosure by banks making settlements with the SEC? Maybe. This win by the SEC will receive a lot less attention than the initial Rakoff ruling, even though the latter is clearly going to be reversed. So perhaps Rakoff’s goal of attracting attention to the SEC’s deal making will turn out to have been an end in itself.